The present invention relates to an interactive system and method for selling insurance including reinsurance.
Insurance is used to redistribute risks. Insurers or risk carriers assume portions of the risks of their customers or insureds in exchange for premiums. Insureds may also be referred to as cedents in that they cede risks to a risk carrier or insurer. Reinsurance is used by insurance companies to redistribute their exposure to other insurers. In a reinsurance agreement, an insurer (often referred to as a primary insurer or ceding company) transfers or cedes some or all of its exposures and premiums to a reinsurer. The reinsurer then agrees to indemnify the ceding company for a predetermined type and amount of losses sustained.
It is important to understand that insurers, including primary insurers and reinsurers, are regulated as to the amount of insurance they can write, or risk that they can assume, based on the amount of surplus funds they hold. The capacity of an insurer generally refers to the monetary amount of insurance or risk of loss which the insurer can agree to cover based upon their surplus funds. An insurance company can increase its capacity to allow it to write more policies or to write policies with higher limits by reinsuring a portion of its covered risks.
There are two broad types of reinsurance contracts: treaty and facultative. Treaty reinsurance involves an agreement in which the primary insurer agrees in advance to cede certain classes of business or types of insurance to the reinsurer. For example, part of the primary insurer's business may be aviation insurance, through which the primary insurer provides aviation insurance to multiple commercial airliners. Under a treaty reinsurance contract, the reinsurer would agree to reinsure some portion of the risk of all of the primary insurer's aviation insurance contracts. Individual risks are not underwritten or discussed; the reinsurer relies on the primary insurer to accept only risks that fall within acceptable underwriting criteria and reinsures all risks that fall within the reinsurance treaty agreement. Facultative reinsurance, on the other hand, involves separate reinsurance agreements for each risk or policy that is being reinsured.
In addition to the broad types of reinsurance contracts, treaty or facultative, there are also various ways in which the parties may share or cede the risks. Two broad classifications of risk sharing arrangements are referred to as Proportional Arrangements or Excess Arrangements.
In a proportional agreement, a certain portion of every risk covered by the agreement is ceded. The primary insurer and reinsurer share a portion of all insurance, premiums and losses in the same amount. The primary insurer is paid a commission in exchange for ceding the risk portion and premium to the reinsurer. A proportional agreement may be written on a quota share or surplus share basis.
In a quota share agreement, the primary insurer's retention (retained risk) is stated as a percentage of the amount insured. The insurer retains the same percentage of insurance, premium and losses and cedes the rest to the reinsurer, subject to a reinsurance limit. In a surplus share treaty, the primary insurer's retention (retained risk) is stated as a fixed monetary amount of the amount insured. The primary insurer retains a fixed monetary amount of all insurance, premium and losses that fall within the agreement and cedes the rest to the reinsurer. In either case, a commission is typically paid to the insurer in return for the premium ceded.
To illustrate the differences between quota share and surplus share, assume that a primary insurer wants to write a policy for a property risk valued at $1,000,000. In a quota share arrangement with a 25% retention, the primary insurer would retain $250,000 of the property risk and cede $750,000 to the reinsurer. However, if the property risk were valued at $2,000,000 under the same quota share arrangement, the insurer would retain $500,000 and cede $1,500,000. In a surplus share treaty, the primary insurer may choose to retain $250,000 of each property risk insured. The primary insurer thus would retain $250,000 on both a $1,000,000 property risk, ceding $750,000, and on a $2,000,000 property risk, ceding $1,750,000.
In an excess reinsurance agreement, only losses are ceded to the reinsurer. The primary insurer retains the amount of insurance and premium, and commissions are not normally paid. Three standard types of excess agreements are per risk excess, per occurrence excess, and aggregate (stop loss) excess.
In an aggregate excess agreement, the retention is calculated based on all losses over a period of time stated in the agreement. The retention may be stated in a monetary amount, a loss ratio, or some combination of the two.
In per risk excess arrangements, losses above a certain monetary amount are ceded to the reinsurer, which is responsible for all losses from any one exposure above this monetary amount up to the reinsurance limit. Per occurrence or per loss excess arrangements are similar to per risk arrangements. However, the retention is stated as an amount incurred per occurrence. An occurrence may be one hurricane, one flood or one accident that results in liability claims.
The difference between per risk and per occurrence excess can be illustrated in the following example in which a hurricane damages 100 covered homes in a given area. If the primary insurer ceded the losses on a per risk basis with a $10,000 retention, it would be responsible for the $10,000 retention on each of the 100 homes, or $1,000,000. However, on a per occurrence basis, the primary insurer may have retained $250,000 per occurrence, in which case the primary insurer would have to pay $250,000 and the reinsurer would be responsible for the rest of the losses up to the reinsurance limit.
Original Loss Warranty (“OLW”) protection is a type of per occurrence excess agreement in which the reinsurer pays the reinsurance cover amount only if the total amount of a covered loss exceeds a set amount or trigger point. OLW protection is often utilized in high risk insurance such as aviation, space and energy/marine. In such high risk insurance, the risk is often spread among multiple carriers, each covering a portion of the total risk.
The following example is provided to illustrate possible application of OLW protection in a high risk insurance, namely aviation insurance.
A primary insurer of International Airline accounts seeks reinsurance for its portfolio of aviation insurance contracts. The primary insurer's portfolio includes a 10% line (i.e. it receives 10% of the premiums and must pay 10% of each claim) on aviation insurance for a first airline which runs for 12 months beginning on January 1, a 5% line on aviation insurance for a second airline, effective 12 months beginning on April 1; and numerous other insurance policies with different various percentages of participation and policy periods. The primary insurer's exposure out of these various contracts is very high and the primary insurer seeks reinsurance to reduce its exposure.
OLW protection for such a portfolio might be structured such that the reinsurance contract provides for a cover amount of $3,000,000 if any one of the insureds covered by an aviation insurance policy in the primary insurer's portfolio has a loss which exceeds a trigger point of $750,000,000 during the period of the reinsurance contract in exchange for a premium of $800,000. It does not matter which of the primary insurer's insureds suffers the loss, nor the primary insurer's participation in the insurance contract of the insured suffering the loss. If a loss occurs during the reinsurance policy period which exceeds the trigger point, the reinsurer pays the reinsurance cover amount.
Historically, reinsurance contracts have been initiated by the primary insurer, or by a broker on behalf of the primary insurer, which approaches a reinsurer and requests coverage of a certain amount of its portfolio. An underwriter for the reinsurer then evaluates performance data for the primary insurer and evaluates the risk associated with the requested reinsurance amount and decides how much coverage or capacity the reinsurer is willing and able to offer and under what financial and legal terms. This offer is then either accepted or declined by the cedent. This process is typically effected by telephone, fax, letter and personal contact and may involve ongoing negotiations as to the financial and legal terms or the amount of capacity offered. These are essentially the same methods used for selling most types of insurance.
The historical method of marketing or selling insurance, including reinsurance, limits the ability of the insurer to be proactive in its effort to sell its insurance services and often results in inefficiencies in utilization of the insurer's capacity.